'Slow Steaming' to Affect Retailers as Shipping Supply and Demand Are Out of Whack

Includes: COST, LCUT, RTH, SEA
by: The Operations Room

by Martin Lariviere

Global trade is picking up. Want evidence for that? Look at what’s happening to the cost of moving a container across the Pacific:

The New York Times had an interesting article discussing how these rates have risen, how service has gotten worse, and how this is impacting retailers in the US (Retailers Pay More to Get Cargo (No Guarantee), Jul 27). The cost increases are significant:

Lifetime Brands, which makes and sells products under brand names like Cuisinart and KitchenAid, said it was now paying about double last year’s rates, and Costco said it was now back to 2007 rates.

Companies that lack contracts with shippers are paying even more. The cost of shipping a 40-foot container from Hong Kong to Los Angeles without a contract, or the spot rate, was about $871 in July 2009, a five-year low. This month, that spot rate reached $2,624, a five-year high, according to the industry consultant Drewry Shipping Consultants, as reported by The Journal of Commerce. That exceeded even the cost before the recession, which was about $2,000.

You don’t have to be an econ major to recognize that rising prices suggest that supply and demand are out of whack and that is largely true. Shipping lines pulled capacity out of service when the economy tanked and they have been slow to bring all the boats back. They are cautiously managing capacity in order to support the higher prices. Shipping lines have also adopted a policy of “slow steaming” — reducing the speed at which ships move in order to reduce fuel consumption. To make matters worse, there is simply a lack of containers:

“There aren’t enough actual containers, so therefore, even if the vessel capacity situation is easing up a little bit,” said Peter Tirschwell, senior vice president for strategy at The Journal of Commerce, “you now have equipment that people can’t get.” …

The problems in container shipping from Asia are the most pronounced, retailers say, but shipments from other continents, and via domestic trains and trucks, are difficult as well. The effects have been severe for some retailers and suppliers.

So how has this impacted firms importing goods into the US? Some have had goods featured in promotions miss the start of the selling season. Others have had to pay premia that they are contractually not supposed to pay. In short they are scrambling.

Mona Williams, vice president for buying at the Container Store, said the company was telling manufacturers to book space well in advance, and that it was moving delivery dates earlier.

And for items that simply must arrive, well, there are ways to do it. “Sometimes you can offer to pay a steamship company a larger amount of money, and they might take somebody else’s container and not put it on,” said Jeffrey Siegel, the chief executive of Lifetime Brands, but “in most cases, you just have to wait.”

To play it safe, Mr. Siegel has started scheduling items to arrive as long as three months before they need to be in stores. That means a higher cost for holding inventory than usual, but interest rates are relatively low, and he would rather have the goods in hand, he said.

I see a few interesting points in this story. The first points to the inherent difficulties of sourcing in remote locations. As mentioned in Monday’s post, retailers have been pressuring suppliers for greater responsiveness. That will only go so far if it’s impossible to get the items shipped to the market. One has to have responsive logistics to complement flexible manufacturing.

Also, the whole slow steaming thing is pretty intriguing. The Observer had an article on the topic, the title of which put things rather bluntly: Modern cargo ships slow to the speed of the sailing clippers (Jul 25 — kudos to Bruce Hartman at the Cal Maritime Academy for pointing me to this one). Some shipping lines have slowed to 12 knots while pre-Civil War clipper ships averaged 14 – 17 knots. The results are fairly eye-popping:

Maersk, the world’s largest shipping line, with more than 600 ships, has adapted its giant marine diesel engines to travel at super-slow speeds without suffering damage. This reduces fuel consumption and greenhouse gas emissions by 30%. It is believed that the company has saved more than £65m on fuel since it began its go-slow.

Ship engines are traditionally profligate and polluting. Designed to run at high speeds, they burn the cheapest “bunker” oil and are not subject to the same air quality rules as cars. In the boom before 2007, the Emma Maersk, one of the world’s largest container ships, would burn around 300 tonnes of fuel a day, emitting as much as 1,000 tonnes of CO2 a day – roughly as much as the 30 lowest emitting countries in the world.

Maersk spokesman Bo Cerup-Simonsen said: “The cost benefits are clear. When speed is reduced by 20%, fuel consumption is reduced by 40% per nautical mile. Slow steaming is here to stay. Its introduction has been the most important factor in reducing our CO2 emissions in recent years, and we have not yet realised the full potential. Our goal is to reducing CO2 emissions by 25%.”

There are obvious social gains to reducing carbon emissions. But I wonder whether there are unintended consequences from slow steaming. For example, if more importers resort to air freight as a consequence, how much does that offset the carbon reduction from Maersk and other shippers? Also, if retailers are forced into longer planning horizons because of slow steaming, by how much will that increase wastage and the production of unneeded goods?